On December 31, 2012, as Times Square in New York was getting ready to drop the crystal ball, the Internal Revenue Service (IRS) dropped long-awaited guidance regarding retirement plan corrections in the form of Revenue Procedure 2013-12. This Revenue Procedure updates the Employee Plans Compliance Resolution System (EPCRS), which includes the Voluntary Correction Program (VCP), and provides guidance on methods available to sponsors of tax-qualified retirement plans to correct operational and plan document errors in order to preserve a plan’s tax-qualified status. Rev. Proc. 2013-12 provides crucial relief for 403(b) plans and a potpourri of other enhancements and clarifications to EPCRS, which was last revised in Rev. Proc. 2008-50. EPCRS provides three correction programs known as: (1) Self-Correction Program (SCP); (2) VCP; and (3) Correction on Audit Program (Audit CAP).
The following is a description highlighting the more significant changes found in the new Revenue Procedure.
• 403(b) plan correction procedures. Rev. Proc. 2013-12 includes long-awaited guidance regarding the correction of 403(b) plan errors. Under prior IRS guidance only a handful of 403(b) plan errors could be corrected under EPCRS, typically violations of specific Internal Revenue Code Sections. Additional 403(b) plan failures, which are now available for correction under the new Revenue Procedure, generally follow the procedures available to correct errors in all other qualified plans. The new plan correction procedures apply to 403(b) plan failures arising on or after the effective date of the final Code Section 403(b) regulations (January 1, 2009).
o Plan document errors—403(b) plan sponsors may now correct plan document failures through EPCRS. Under EPCRS, a plan document failure arises when a plan document provision (or the absence of a provision) on its face violates Code Section 403(b). The guidance applies to the failure to timely or properly adopt or amend 403(b) plan provisions on or after January 1, 2009.
o Operational errors—In addition to the correction of plan document failures, the IRS extended EPCRS to include correction of operational failures under 403(b) plans related to the failure to follow written plan document terms. Prior to the issuance of Rev. Proc. 2013-12, a 403(b) plan sponsor could not correct a failure to follow the terms of a written 403(b) plan document under EPCRS unless the failure otherwise qualified for the limited relief available to 403(b) plans under EPCRS.
o Self-correction program—The relief under SCP for the correction of “significant” operational failures is available only to plans that are subject to a favorable determination from the IRS. Currently, there is no procedure by which a 403(b) plan may obtain a favorable determination letter from the IRS. However, Rev. Proc. 2013-12 deems a 403(b) plan to be subject to a favorable determination from the IRS for purposes of EPCRS if (1) the employer adopted a written 403(b) plan document in accordance with the Code Section 403(b) final regulations (generally by December 31, 2009 for plans in existence at that time), or (2) the plan failed to comply with the written plan document requirements of the Code Section 403(b) final regulations but was corrected through VCP.
• Streamlined VCP application procedures. The basic structure of the streamlined application procedures that address a number of common failures remains intact except for a redesignation of the Appendix F schedules as Appendix C, Part II schedules. A few notable modifications worth mentioning are as follows:
o The IRS clarifies through instructions on Appendix C, Schedule 1 (Interim and Certain Discretionary Nonamender Failures) when a plan sponsor should use Schedule 1 or Schedule 2—(Nonamender Failures [other than those to which Schedule 1 applies] and Failure to Adopt a 403(b) Plan Timely).
o The IRS now requires plan sponsors to individually list nonamender failures on Appendix C, Schedule 1 in lieu of checkboxes. The specific plan requirement item on the cumulative list generally suffices as an adequate description for listing on the Appendix F, Schedule 1.
o 403(b) written plan document failures are addressed on Appendix F, Schedule 2.
• Section 457(b) plans. Consistent with prior guidance, the IRS continues to provide relief for governmental plans on a provisional basis outside of EPCRS while generally precluding tax-exempt 457(b) plans (also known as top-hat plans) from receiving relief. However, the IRS has opened the door for relief to tax-exempt 457(b) plans in specific circumstances such as when nonhighly compensated employees are erroneously permitted to participate. There may be other circumstances where the IRS may provide relief in sympathetic situations.
Substantive Changes
• Section 436 failures for a defined benefit plan. There is a new section in Rev. Proc. 2013-12 that provides a roadmap for correcting operational failures relating to benefit restriction violations under Code Section 436. In certain cases, plan sponsors (or other parties) may need to allocate an additional corrective contribution to make the plan whole.
• ADP and ACP corrections. While EPCRS generally provides more flexibility with each reiteration, the IRS tightened the rules on correcting failed ADP and ACP tests. Appendix A of Rev. Proc. 2013-12 clarifies that forfeitures cannot be used to fund qualified nonelective contributions (QNECs) for this type of failure. Rather, the required QNEC corrections must satisfy the QNEC definition found in Treas. Reg. 1.401(k)-6. For that reason, employers must fund the corrective contribution.
• Missed matching contribution. The IRS no longer mandates a QNEC to correct a matching contribution failure. Prior to Rev. Proc. 2013-12, the IRS required a QNEC to correct a missed matching contribution in connection with a missed deferral. The IRS now permits a corrective employer contribution subject to the plan’s vesting schedule.
Compliance Fee Modifications
• The IRS is providing a one-year 50% discount to resolve written 403(b) plan document failures. The fee discount expires on December 31, 2013.
• For those plan sponsors that are not required to file a Form 5500, such as governmental plans or certain church plans, the IRS clarifies the rules to determine the number of participants and the corresponding compliance fee.
• The IRS added a fee relief provision for a very common failure that occurs in connection with a favorable determination letter. Often, a plan sponsor receives a favorable determination letter conditioned on executing a proposed amendment within 91 days of the IRS issuing a favorable determination letter. If the plan sponsor fails to execute the amendment within this timeframe, then there is a qualification failure. The following conditions must be met to take advantage of the new flat $500 fee remedying this failure:
1. The plan sponsor executes the amendment within three months of the expiration of the applicable remedial amendment period. This will be approximately 182 days (91 days plus three months) following the issuance of the determination letter.
2. This failure is the sole failure of the VCP submission.
Similarly, the IRS added relief for this type of failure when discovering the error during the determination letter process. The fee in this situation is a flat $1,000.
• Finally, the IRS introduces an electronic fund transfer option to pay the compliance fee.
Procedural and Administrative Changes
• New Forms 8950 and 8951—Form 8950 is an application cover sheet which effectively replaces former Part I of Appendix C and Part I of Appendix F. Form 8951 is a compliance fee check-the-box form that is similar to Form 8717 (used for determination letter applications).
• VCP submissions must be sent to new addresses for first class mail and express mail deliveries instead of the old Washington, DC address:
First Class mail
Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192
Express mail or private delivery service
Internal Revenue Service
201 West Rivercenter Blvd.
Attn: Extracting Stop 312
Covington, KY 41011
• The IRS letter Forwarding Program as of August 31, 2012 is no longer available as a search method for locating lost former employees due additional retirement benefits. Rev. Proc. 2013-12 lists various actions that a plan sponsor must use to locate these lost former employees. Fortunately, IRS understands the practical implications of the program’s elimination. As a result, IRS provides a limited grace period from meeting the 150-day correction period under VCP and for occasions when the plan sponsor is correcting under SCP with an expired correction period.
Determination Letter Procedures Clarified
• Determination letter requirement. In recent years, the IRS has narrowed the situations requiring or permitting a determination letter in connection with a VCP. Rev. Proc. 2013-12 continues that trend by limiting the required submission of a determination letter application to two situations:
1. Submissions that include a corrective amendment for an operational failure made during an on-cycle year or in connection with a plan termination. Notably, the IRS will no longer accept determination letter applications that accompany demographic failures.
2. Submissions that include a nonamender failure as defined under EPCRS.
• Calculation of earnings. The Revenue Procedure for the first time defines earnings clarifying that earnings generally refers to investment gains and losses. It is still optional to include losses for corrective allocations.
Missed Opportunities
Regrettably, Rev. Proc. 2013-12 does not address several crucial compliance issues as follows:
• Plan loan failures. Despite repeated requests from the employee benefits community, the IRS will not permit a plan sponsor to self-correct to obtain income tax relief associated with plan loan failures. A plan sponsor still must use VCP to obtain income tax relief.
• Automatic enrollment failures. Rev. Proc. 2013-12 provides a safe harbor correction for a scenario where an employer does not give an employee the opportunity to make an affirmative election. Another common situation is when an employer provides the opportunity for an employee to make an affirmative election (and the employee does not make the election) but does not timely withhold the default percentage on behalf of the employee. The IRS continues to ask for comments to address this situation. Although the IRS did not provide safe harbor corrections for this type of failure in Rev. Proc. 2013-12 they have provided informal guidance through the August 2012 Employee Plans Newsletter. This newsletter recommends an approach providing a makeup contribution based on 50% of the default contribution percentage the affected employee would have received if not excluded from the plan.
Until further guidance is issued, the IRS is likely to accept the suggestions included in the Revenue Procedure, the newsletter, or other reasonable and appropriate corrections adhering to EPCRS principles.
Effective Date
Plan sponsors may apply the provisions of Rev. Proc. 2013-12 beginning on or after December 31, 2012. However, this Revenue Procedure must be used beginning on April 1, 2013. Plan sponsors must use the new Forms 8950 and 8951 for VCP submissions that utilize this Revenue Procedure. Curiously, despite issuing early release draft forms in August 2012, the IRS has not finalized these forms yet.
Conclusion
The new EPCRS guidance overall is a welcome enhancement to the IRS’s very popular correction program, especially for employers maintaining 403(b) plans. The streamlined correction methods will encourage employers to utilize the various programs under EPCRS. The compliance fees for VCP remain level or will decrease for a number of common failures. The introduction of Forms 8950 and 8951 demonstrate the IRS’s intent to align the VCP process to the process for submitting determination letter applications. Hopefully, electronic submissions will follow in the near future.
Should you have any questions about this new guidance or generally about IRS correction programs, please contact the Ogletree Deakins attorney with whom you normally work or the Client Services Department via email at clientservices@ogletreedeakins.com.
